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The Effects of Bussiness Cycles on Growth

In: Economic Growth: Sources, Trends, and Cycles

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  • Antonio Fatás

    (European Institute of Business Administration)

Abstract

This paper studies the link between business cycles and long-term growth rates. We present empirical evidence that uncovers interesting and significant interactions between cycles and growth. We show that business cycles cannot be considered as temporary deviations from a trend and that there is a strong positive correlation between the persistence of short-term fluctuations and long-term growth rates. A simple endogenous growth model where business cycles affect growth can easily replicate this correlation. We then study the link between volatility and growth. We show that countries with more volatile fluctuations display lower long-term growth rates. We also find evidence that there is a non-linearity in this relationship. The effect of business cycles on growth is much larger for poor countries or countries with a lower degree of financial development.
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Suggested Citation

  • Antonio Fatás, 2002. "The Effects of Bussiness Cycles on Growth," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Economic Growth: Sources, Trends, and Cycles, edition 1, volume 6, chapter 7, pages 191-220, Central Bank of Chile.
    • Handle: RePEc:chb:bcchsb:v06c07pp191-220
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    1. repec:sgh:gosnar:y:2012:i:5-6:p:57-77 is not listed on IDEAS
    2. Hnatkovska, Viktoria & Loayza, Norman, 2004. "Volatility and growth," Policy Research Working Paper Series 3184, The World Bank.
    3. Eze, Titus Chinweuba, 2016. "Re-Examination of Wagners Hypothesis: Implications for the Dwindling Oil Revenue in Nigeran Economy," Asian Development Policy Review, Asian Economic and Social Society, vol. 4(3), pages 74-90, September.
    4. John G. Fernald, 2015. "Productivity and Potential Output before, during, and after the Great Recession," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 1-51.
    5. Paolo Mauro & Torbjorn I. Becker, 2006. "Output Drops and the Shocks That Matter," IMF Working Papers 06/172, International Monetary Fund.
    6. Christian Volpe Martincus & Andrea Molinari, 2007. "Regional Business Cycles and National Economic Borders: What Are the Effects of Trade in Developing Countries?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(1), pages 140-178, April.
    7. repec:taf:specan:v:12:y:2017:i:2-3:p:251-278 is not listed on IDEAS
    8. Lopez , J. Humberto & Perry, Guillermo, 2008. "Inequality in Latin America : determinants and consequences," Policy Research Working Paper Series 4504, The World Bank.
    9. Calderon, Cesar & Loayza, Norman & Schmidt-Hebbel, Klaus, 2005. "Does openness imply greater exposure ?," Policy Research Working Paper Series 3733, The World Bank.
    10. José De Gregorio, 2007. "Algunas Reflexiones sobre el Crecimiento Económico en Chile," Economic Policy Papers Central Bank of Chile 20, Central Bank of Chile.

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